Generating Plant Woes

We've all been feeling the pain of inflation these days, with the cost of energy boosting everything from airfares to groceries. But if you think you’ve got it bad, take a moment to ponder the case of today’s electric utilities. Power plant building costs have more than doubled since 2000, according to recent research, and they show no signs of slowing.

Steel alone could jump more than 50 percent in 2008, according to a May report released by Cambridge, Mass.-based Cambridge Energy Research Associates (CERA) and its parent company, IHS. This jump is driven by iron ore prices rising 65 percent or more and coking coal prices reaching $300 per ton.

“These are things that keep people up at night,” said Candida Scott, CERA’s senior director of cost and technology, and a lead author of the IHS CERA Power Capital Costs Index.

Booming overseas growth

Rising international demand for commodities is one of the biggest factors driving today’s spiking prices. China and India are not just buying more petroleum to power their fast-developing automobile fleets. They also are taking a bigger share of the world’s steel and concrete. China is building new power plants at a record pace, and that makes those raw materials more expensive for everyone.

“That’s placing a lot of demand on our underlying resources,” Scott said earlier this year. “I think 2008 will see continued cost increases.”

Generating-equipment costs are adding to utilities’ bottom-line woes. Many makers of engines, turbines and other large-scale generating machinery have moved manufacturing operations out of the United States. Today’s weak dollar is driving overall plant costs even higher.

“The majority of the cost of any power plant is the cost of the generating equipment and much of that is sourced internationally. If they’re getting it from overseas, that’s having a huge impact,” he said.

Also contributing to today’s more expensive projects is a relative shortfall in the engineering talent required to design the plants and manage their construction. Just as the electrical construction industry is struggling to attract younger workers, engineering firms are facing similar difficulties. And, with international markets growing so quickly, U.S. designers are in demand all over the world.

“There is a looming shortage of these people,” Scott said. “It is going to impact the industry and what we can do.”

Budget-planning complications

Rapidly rising costs can complicate utility planning efforts. Getting a large coal-fired plant built, from initial licensing to the time the first kilowatts start flowing, can take six to 10 years, according to Charles Anderson, president of Brewster, Mass.-based utility consultants CKA Associates. And planning for the next generation of nuclear plants (licensing and procurement processes already are underway in Florida and North Carolina) can take even longer.

“You just have to start down the path, one way or the other,” he said.

The largest generating plants, those powered by coal or nuclear fuel, are facing the biggest cost increases, Anderson said, because these plants use the greatest quantities of steel and concrete, other increasingly expensive commodities. Interestingly, he doesn’t see rising construction expenses standing in the way of nuclear energy’s future. With energy costs climbing alongside those for commodities, nuclear plants could be less expensive over their lifespans than oil and natural gas plants, especially if carbon taxes become a reality.

“If you believe in global warming, nuclear is one of the better options in terms of baseload plants,” he said. “These large baseload plants still look pretty competitive on a cost-per-kilowatt basis.”

Construction slowdown unlikely

Despite all the questions and concerns over rising costs, few observers see rising plant-construction prices leading to a halt in ongoing construction efforts. Electricity demand doesn’t show any signs of slowing down, and regulated utilities are required to build the generating capacity needed to meet that demand. The North American Electric Reliability Council (NERC) expects demand to grow by 19 percent in the period 2006 and 2015, and the Energy Information Administration anticipates utilities will need to build 258 gigawatts of new capacity by 2030 to meet demand and replace aging plants.

The rising costs could affect the ability of independent or “merchant” power producers to raise new capital, Anderson said. But utility-backed projects still are likely to go through. Fuel costs still are the primary driver determining our monthly electricity bill, so less expensive oil- and gas-fired peaking plants would still mean higher rates in the long run. And, because most utility plants are amortized over a 15- to 30-year period, Anderson doesn’t expect to see dramatically higher construction costs translate into equally significant rate hikes.

“The utilities will still finance these plants in the market. I don’t think you’re going to see a huge run-up. If you do, it will be because of the oil and gas peaking plants,” he said.

Chuck Ross is a freelance writer and editor who has covered building and energy technologies for a range of industry publications and websites for more than 25 years. He specializes in building and energy technologies, along with electric-utility bus...

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